SandRidge Digs for More Oil with a Billion Dollar Deal for Arena Resources


Back in November 2007, SandRidge Energy (SD) raised $746.2 million in an IPO as the company benefited from the natural gas boom. The stock price went from $26 to $62 by the middle of 2008. But then natural gas started to cool down, along with the US economy.

Now with a stock price at $7.35, SandRidge has been trying to get its groove back. Its strategy is to transform itself into an oil producer. Last November, SandRidge agreed to pay $800 million for the oil and gas properties in the Permian Basin from Forest Oil (FST). A month before, the company tried to purchase bankrupt oil producer Crusader Energy Group but the deal fell through.

This week, there is another big deal. SandRidge will merge with Arena Resources (ARD), paying $1.6 billion to Arena shareholders in a deal worth $6.2 billion. Arena shareholders will receive stock and cash worth roughly $40 per share.

A New Vision

Founded in 2000, Arena is an oil and gas exploration company that has operations in Texas, Oklahoma, Kansas and New Mexico. The company's most lucrative area is in West Texas.

The West Texas fields have been in production since the 1930s and thus have a fairly low risk profile. At the same time, the wells are shallow, with penetrations less than 6,000 feet (according to the acquisition presentation). Because of this, Arena has a low-cost source of oil. A typical well costs only $500,000 or so for the company, compared to multi-millions for wells in tougher environments, like shale.

The company also has a strong reserve base, 69 million barrels of oil equivalent as of the end of 2009.

All in all, a company like Arena fits nicely within the new vision for SandRidge's CEO, Tom Ward. Since late 2008, he has been clear in his ambition to transform SandRidge into a major player in the oil industry. In fact, he believes there will be a long-term bear market for natural gas. And as for oil, he thinks it is possible to make ten times more money. Not bad, huh?

No doubt, Ward has a strong background in the Oil Patch. Actually, he was the co-founder of Chesapeake Energy (CHK). More importantly, he also continues to be a large shareholder of SandRidge, so he has lots of incentive to boost shareholder value.

But, the fact remains that the trends in the energy markets are quite complex. After all, why didn't Ward anticipate the fall in natural gas?

So it should be no surprise that investors are skeptical of Ward's latest deal. In today's trading, the shares of SandRidge are off 6%.